ECON 110 Fall 2007 Problem Set 9 Solutions - National...

National Accounts In Orangeland, a closed economy, Orangelanders live only on orange juice. There is a farm that produces oranges and a factory that produces OJ. In 2003, the orange farm produced 10 oranges, and sold them to the orange juice company at $1 each. The orange juice company produced 3 bottles of orange juice, and sold them all at a unit price of $10 plus 10% indirect tax collected by government (so the price paid was actually $11). The orange farm paid total wages of $6. The orange juice company paid total wages of $10. Both companies retained 50% of their net profits (after depreciation) and paid the rest of it as dividends to the households. After receiving their wage income and their dividends, the households paid a 10% direct tax on their total income to the government. The government bought one orange juice bottle (for $11). The government made no social transfers. (Notice that the firms are not paying any direct taxes on their retained profits) 1.

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